The US Department of Labor (DOL) issued a final rule this week, describing the factors employers should consider when analyzing whether workers should be classified as employees or independent contractors. The new rule will take effect on March 11.
This new rule rescinds a 2021 independent-contractor test and returns to the economic-reality analysis traditionally used by the DOL and by courts to determine whether a worker is an employee or an independent contractor.
The factors, none of which is more important than the others, are described below.
The Worker’s Opportunity for Profit or Loss Depending on Managerial Skill
Among other facts, consider whether the worker determines or can meaningfully negotiate the pay for the work provided; whether the worker accepts or declines jobs; whether the worker chooses the order and/or the time in which jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand the worker’s own business or to secure more work; and whether the worker makes decisions to hire others, purchase materials, and equipment, and/or to rent space.
The DOL makes clear that the decision to work more hours or to take more jobs when paid a fixed rate per hour or per job is generally not considered to reflect the exercise of managerial skill.
Investments by the Worker and the Potential Employer
According to the DOL, any costs an employer imposes on a worker do not count. Nor do costs for tools and equipment needed to perform a specific job. Rather, this factor is about capital and entrepreneurial investments.
In addition, the worker’s investments should be considered on a relative basis with the potential employer’s investments in its overall business.
The Degree of Permanence of the Work Relationship
This factor weighs in favor of workers being independent contractors when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the workers having their own businesses and marketing their services or labor to multiple entities.
On the other hand, this factor weighs in favor of workers being employees when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers.
The Nature and Degree of Control by the Potential Employer
Facts relevant to analysis of this factor include whether the potential employer sets the worker’s schedule, supervises the performance of the work (in person or using technological means), or explicitly limits the worker’s ability to work for others.
Similarly, reserving the right to do any of the above is considered to be control by the potential employer, even if the employer does not actually exert such control.
Control by the potential employer of economic aspects of the working relationship should also be considered. This includes control over prices for services and marketing of the services or products that are provided by the worker.
The new rule makes clear that actions taken by a potential employer for the sole purpose of complying with specific laws are not indicative of control. This does not extend to actions that serve the potential employer’s own safety, quality control, contractual, or customer-service standards.
The Extent to Which the Work Performed Is an Integral Part of the Potential Employer’s Business
This factor doesn’t depend on whether any individual worker is an integral part of the business. Instead, the question is whether the function the worker performs is an integral part of the business.
This factor weighs in favor of the worker being an employee when the work performed by that worker is critical, necessary, or central to the potential employer’s principal business.
The Worker’s Skill and Initiative
This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. Unfortunately, the new rule does not define “business-like initiative.”
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The Rule also says that additional factors may be relevant if the factors indicate whether workers are in business for themselves as opposed to being economically dependent on the potential employer for work.
Note that these factors are those used by the federal DOL. Factors considered when classifying a worker may differ depending on the agency and the law involved.
In other words, the factors might be different when the worker is being characterized under the federal employment laws than when the worker is being characterized under the federal tax laws.
Similarly, the factors may be different when characterizing a worker for federal law purposes than when characterizing a worker for state law purposes. Factors also vary from state to state.
Businesses often prefer to characterize their workers as independent contractors rather than as employees, since independent contractors are responsible for their own taxes, including FICA, and are not subject to many of the laws protecting employees, such as wage and hour laws.
If, however, you treat someone as an independent contractor and that person is recharacterized as an employee by a government agency, significant penalties may be imposed.
Further, those who believe they have been misclassified as independent contractors are increasingly filing lawsuits against their employers.
Whether you are an employee or an employer, please feel free to contact us if you have any questions about worker classification or any other employment-law issues.
For more information about employment law, see Employment Law (in Plain English)®, co-authored by members of this law firm.
The book is available through Skyhorse Publishing, Amazon, Barnes & Noble, Powell’s Books, and Bookshop (an online bookstore that allows you to support your favorite independently owned bookstore).
Photo by Josh Olalde on Unsplash
